It's Good to Be Worthless

The best time to sell your business is when it no longer has any use for you. How to pull yourself out of the picture—and double your company's value in the process

Written by Mark Wardell

If you’re like most business owners, you’ve poured years of blood, sweat and tears into your company and deserve to reap the rewards of all that hard work. But there’s no guarantee that all your efforts will translate into as much value as you’re expecting when it comes time to sell.

That’s partly because two-thirds of all Canadian business owners plan to exit their companies within the next 10 years, according to the Canadian Federation of Independent Business. This will create a buyers’ market that will make it hard to get top dollar for your firm.

You can’t do anything about that. But there’s a great deal you can do to address the main reason you might wind up frustrated by how little investors are willing to pay for your business: that too much of its value is wrapped up in you personally. Fortunately, for most firms, a couple of years is plenty of time to fix this problem and thereby double or even triple their value.

To see why this is possible, you need to understand the concept of goodwill. This is a measure of how much your firm is worth beyond its liquidation value from tangible assets such as machinery, furniture and inventory. Goodwill will make up the majority of your firm’s sale price.

It comes in two varieties: personal and business. Personal goodwill is the portion of a firm’s value directly associated with its owner, including his or her name, reputation, contacts, skills and abilities. Unfortunately, it’s not transferable when a company is sold, because most of it leaves with the owner. The hard truth is that the value of many SMEs is largely tied up in unsaleable personal goodwill.

Business goodwill, in contrast, is the portion of a firm’s value associated with the company itself, such as brand recognition, location, procedural manuals and market share. Unlike personal goodwill, it’s readily transferable from one owner to another, so a buyer is willing to pay for it.

If you can determine how much of your goodwill is of each kind, you can start working to boost your firm’s value by transforming personal goodwill into business goodwill. What follows is a 10-step plan for doing so. It’s no quick fix. But the more of these steps you complete, the more you’ll transform your business from an elaborate job into a true investment opportunity for a potential purchaser.

Map out the way ahead

A business with a solid growth plan is a far more enticing investment than one with no clear strategy — but not if the plan is locked away inside your head. Putting a realistic plan in writing lets a prospective buyer know he’s investing in a business that’s on its way up. It also offers reassurance that you’re not abandoning ship just before you hit an iceberg.

Don’t go overboard with a massive, 200-page plan; two pages will suffice. But it’s crucial to have something on paper showing why your firm has a compelling future and how it intends to get there. As you write this plan, you’ll need to answer questions such as how many locations you’ll have, how profitable you’ll be and in which ways you’ll outdo the competition. You should then reverse-engineer your goals onto a spreadsheet that lays out the steps you’ll need to take to fulfill your plan.

Push your birds out of the nest

If you’re the only true leader in your business, its dependence on you will limit your firm’s value. Nurturing leadership at all levels of your organization will help secure its future, increasing the value of your business while giving you a built-in resource for your succession.

To do this, slowly but surely hand off bite-sized chunks of authority to your people to see how they handle it. For example, you might let your sales reps prepare their own quotes up to a set dollar amount or give each manager control over a specific aspect of the budget. Those who do well should be given increasing authority, and the natural leaders will soon emerge. You can then start to plot career paths for your most promising candidates.

Spell out who does what

The best employees in the world are of limited value if they don’t clearly understand what’s expected of them. Spending a little time documenting responsibilities, including organizational charts and job descriptions, will go a long way toward maximizing your team’s effectiveness.

Remember, the less your people depend on you for guidance to do their jobs, the greater the value of your business goodwill will be.

Delegate to proven performers

Relinquishing control to a management team is a scary proposition for many entrepreneurs. After all, you built your business, so how could anyone else run it as well as you can? But you have to free yourself from day-to-day management if you’re to implement the rest of this plan.

You need to find people who have shown they can manage a business like yours at least as well as you can. If they already work for you, you’re in luck. Otherwise, research the all-stars who have successfully transformed competing firms. Are they available? Ask industry colleagues, friends, suppliers, vendors and recruiters if they know potential candidates who match your needs.

Document how to do business

Chances are most of your operating policies and procedures are stored inside your head and those of a few employees. To a prospective buyer, this represents risk. You can significantly reduce this risk if you can give a potential purchaser a well-crafted business manual with the policies and procedures required to run your firm, including all the associated forms, letters and checklists. As a bonus, compiling this manual will help you identify and correct weaknesses in your operations, further boosting your company’s value.

To tackle this major project, you should designate a project manager, then create a task force with members from each department to compile a comprehensive list of company systems. Next, prioritize this list in order of importance as A, B or C. Then assign each of your A-level systems to a key employee involved in that system, leaving B- and C-level systems for later.

You should organize the documents the task force will create in an electronic format so they can be easily updated. With our clients, we use a customized version of Microsoft SharePoint, organized under the categories of leadership, management, marketing, finance, operations and sales. But any good document-organizing tool will do.

Gauge results systematically

You need to start tracking key performance indicators such as margin growth, inventory turnover and customer satisfaction to measure your firm’s progress and spot any red flags. This will help keep your entire team focused on achieving measurable goals. And when you’re ready to sell the business, this level of documentation will give a buyer confidence in your financial projections and the potential of your company as a whole.

Compile your results in a standardized format that will let you see quickly how you’re faring, then share this information across your firm. My own company’s numbers suddenly came alive for us once we made them public and started reviewing them in weekly staff meetings.

Hand off key relationships

If you manage your firm’s most important customer and vendor relationships yourself, you’ll find it tough to convince a buyer that these can easily be transferred after the sale. The sooner you can get yourself out of the equation, the better.

Start by introducing your personal contacts to key people in your company, then gradually shift responsibility for dealing with those contacts to them. Advise your clients and vendors that they’ll get better service by dealing with “the right people” in your company, but that you’re always available if they need you.

If you’ve been doing business via handshake deals or e-mail confirmations, you should start putting these agreements in writing. A buyer will want to see contracts that prove you have a solid customer base and that the great deals you’ve been getting from vendors won’t fall through once you’re gone.

Make your firm the brand

Enormous goodwill value is tied up in a firm’s brand, which embodies what customers experience when they do business with your company. However, if they equate your firm’s brand with you personally, your brand will have no real value when it’s time to sell.

You need to first clarify what you want your customers, prospects and employees to associate with your brand, then have your team brainstorm ways to make this brand integral to the way you do business. If a high level of customer service is important to you, make sure you execute this throughout your operations, from the smile in your receptionist’s voice to the thank-you card left behind by your delivery person. Standardizing small but crucial details like this will shift the emphasis from you to your business as a whole, so your company’s brand can live on without you.

hand over your ideas Every company is started and built on the ideas of its founder. As the business grows, these ideas can evolve into intellectual property (IP) that generates value for the company, such as proprietary formulas, logos, marketing tag lines and manufacturing techniques. Even if your clients associate these with your firm, many of them might still legally belong to you. For example, a software designer who launched a company as a sole proprietor might continue to own the copyright on the software personally even after incorporating the business, simply because she hasn’t transferred ownership to her firm.

The good news is that these types of issues are typically fairly easy to resolve. You can reassure a potential purchaser by asking a lawyer specializing in intellectual property rights to have all your IP fully protected through company-owned patents, trademarks and copyrights.

Unleash your team’s creativity

The ultimate way to build value in your business is to create a culture of excellence that taps into the hearts and minds of your workforce. A potential buyer will find your firm far more appealing if you value independent thought and encourage employees to share their ideas than if everyone counts on you alone to drive everything.

One of the best ways to get started on this is a simple yet powerful tactic: add the topic to the agenda of your staff meetings. Ask your people: “Which systems are missing or could be improved?” Employees might not be used to thinking this way, but be patient. Eventually, the answers will come, because people want to be invested in something worthwhile. If you can meet this need by inspiring in them a dedication to continuous improvement, your firm will be well-placed to flourish after you’ve sold it — and to command a sale price that reflects this achievement.

c99fd28c785c977eb24a091c60d9b49fMark Wardell is president of Wardell Professional Development Inc. (www.wardell.biz), a Vancouver-based advisory group specializing in increasing the market value of owner-managed firms.

Originally appeared on PROFITguide.com